Are you struggling to ensure a healthy cash flow for your online business? It goes without saying that slow payments from customers/sales channels make it challenging for a seller to pay suppliers and employees. Consequently, the business will have no inventory and workforce to ensure smooth operation.
On the other hand, with inflows exceeding outflows, a company will have access to extra resources which it can use for growth and expansion. This healthy cash flow can be effectively achieved by inventory management.
This blog will serve as a guide to help your online business enjoy a greater net cash flow by maximizing your inventory’s performance.
Healthy Cash Flow: An Overview
Cash flow refers to the money that is transferred into and out of a business. It is a crucial component of a budget sheet delineating a company’s inflow and expenditures. An increase in cash flow means more money is flowing into your business than out of it.
Once a business generates more cash than its expenditures, the net cash flow will grow over time, and the surplus can be utilized to scale up the operations.
However, it should also be noted that cash flow is not an all-encompassing reflection of a business. A company’s profitability, debt, and other factors also need to be considered to determine its financial security. Having said that, positive cash flow is a vital component of a company’s financial evaluation, indicating its stability.
Effect of Inventory on The Cash Flow
Buying your supply needs cash. And when it sells, that inventory is turned into cash. No wonder poor inventory management can take a heavy toll on your cash flow. To be more specific, issues pertaining to stocks/supply and customer orders can limit your sales, thus impacting your cash flow. However, you can easily keep such concerns at bay if you track inventory in QuickBooks.
Stocking The Supply
You need to be backed with a strong understanding of your inventory to be able to calculate your supply accurately. You need to keep proper track of how often you sell your inventory, which in turn, will give you an idea of the number of products you need to stock. As we will show you in this article, managing your inventory with QuickBooksisn’t as complicated as it sounds.
Having an excess supply will hurt your cash flow by increasing expenses. The cost of your goods rises as you buy and store more inventory. Simultaneously, the demand for goods will fail to match up to the supply amount.
Too low a supply is not recommended either, as having only a small amount of products to sell can generate limited revenue. You need to strike that perfect balance so that you don’t end up overspending on inventory or earning a minuscule amount from sales.
Poor inventory management paves the way for order issues and customer dissatisfaction, which eventually leads to compromised cash flow. When you’re unable to track your inventory, it means that you’re not updating your supply consistently. Besides, you might run the risk of processing an order and failing to complete it just because you don’t have a clear picture of your inventory.
Having fewer products than your expectations means you will either delay the shipping and delivery of the order or cancel it. In either case, the customer will be dissatisfied. Sooner or later, they will lose trust in your brand and discontinue their dealings with you. What follows is a dip in sales and your cash flow taking a hit.
Tips to Improve Your Cash Flow With Right Inventory Management
The main mantra for boosting your cash flow through wise inventory management is to plan ahead. Establish certain well-planned systems and habits to keep a close tab on your inventory so that you can foresee the flow of cash and keep mistakes at bay.
Here are a few tips that will come in handy:
- Track your inventory flow: this might sound like a no-brainer, but it is often overlooked. You should maintain a meticulous record of the following:
- The number of products you’re ordering
- The number of products you’re selling
This record will help you determine whether you’re understocking or overstocking. With a comparative analysis of your products’ inflow and outflow, you’ll have a better idea of how many products you should order to cater to your customer’s demands.
You should assess your inventory flow regularly to identify any seasonal changes. Even better, mapping out this flow on a calendar will give you a visual understanding of how it fluctuates over a period of time. You should accordingly adjust your supply orders to accommodate the ebbs and troughs in demand at different times of the year.
Consistent tracking of your inventory flow ensures that your supply orders are in keeping with the amount of inventory you’re selling. Consequently, you continue to meet the demands without having your cash stuck in extra supply. Result: your revenue sees a spike, and your cash flow stays strong.Improve your order issues: you surely wouldn’t want to put off buyers with order issues, right? Fret not; avoiding order issues is not an unrealistic idea. The trick is to understand past order issues so that you can pinpoint the loopholes in your inventory management. Once you know the root cause, you can devise strategies to adjust your inventory.
Here’s how you can resolve past mistakes with inventory management:
- Make a list of orders that didn’t get fulfilled, were canceled, or didn’t arrive on time.
- Try to understand what drove these issues. Was it because you didn’t have adequate inventory in stock? Did you miss updating your inventory? Some of these issues may also have been caused by shipping carrier issues or a customer’s method of payment, and other factors beyond inventory management.
- Discuss with your team how you can avoid these mistakes in the future.
- You can explore an order fulfillment system if you notice persistent roadblocks in processing and delivering orders smoothly. Programs such as Fulfillment by Amazon and Deliverr not only store your inventory but also pack, ship, and offer customer service. This will allow you to shift your focus from order and delivery issues to other business areas.
On the other hand, you can ensure a positive cash flow with smaller but more frequent inventory orders. This is because:
- Since you purchased only a small amount, you can sell the inventory you purchased in no time. Thus, you recoup the cash quicker instead of having it tied up.
- There is greater flexibility in choosing your supply as you have ample room to adjust your inventory as per the changes in demand. Demands keep shifting often, pretty unexpectedly. In such situations, you certainly want to be stuck with a bulk inventory that is outdated.
- Fresh merchandise is always more attractive, which explains why almost every online store has a section dedicated to “New Items” or “Just Added”. Buyers are generally drawn to what they don’t have, which generates more demand for new products. So, you should go for small and frequent inventory orders to be able to include new products for buyers.
However, this can be tricky if you count on bulk supply deals to make profits. Many suppliers offer attractive discounts on large orders. Try and negotiate with them to arrive at a reasonable price for smaller, frequent orders.
Let’s delve deeper into how you can improve your cash flow:
Ways to Improve Cash Flow
Cash flow can be improved in broadly three ways:
- Increase Cash Inflows: here’s how you can increase your cash flow over the medium to long term:
- Diversify product portfolio
- Offer packaged products
- Have more payment options
- Decrease Cash Outflows: this strategy again sounds obvious, but we need to deep-dive into it and see how it can prove to be rewarding.
- Take on operating leverage, i.e., increase your total operational expenses
- Minimize unnecessary expenses or overheads
- Delay capital expenditure
- Change Working Capital Allocation: if you want to exercise more control over e-commerce cash flow, you should at least have a basic understanding of the concept of working capital.
To put it in a nutshell, your inventory management plays a critical role in your cash flow. Without a proper, well-laid-out inventory management system in place, you’re always at the risk of lowering your inflow or increasing your expenditures. On the contrary, by ensuring a foolproof inventory management system, you optimize how your inventory performs and widen the scope for a strong, positive cash flow.
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